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IPOs in the U.S. by Chinese companies have helped to give rise to some of the country's best entrepreneurial success stories of the past decade. Several members of the new Forbes China Rich List 400 unveiled today (see link here) have U.S.-listed businesses, including No. 2 Robin Li of Baidu and No. 15 William Ding of Netease.

Yet attacks by short-sellers taking advantage of information gaps, changing and costly regulatory rules, and a rise in delistings may be putting a cloud over the future. To learn more about the outlook, I exchanged with Joseph Chan, a corporate partner with U.S. law firm Sidley in Shanghai who has worked on more than $50 billion of venture capital, private equity and other transactions in his career. Excerpts follow.

Q. One of the big stories of the past year for Chinese companies listed in the U.S. has been delistings. Chen Tianqiao's Shanda Entertainment is gone. Jason Jiang's Focus Media is looking to leave. Why is this happening, will it continue, and what does it mean for investors?

A. A number of factors are driving the trend. There was a series of accounting scandals involving China based U.S. listed companies a couple of years ago, brought to light by a number of "research" companies like Muddy Waters that often took short positions in the companies they covered. Stock

price of these companies nose dived. A slew of securities class action suits and SEC investigations followed. Initially most if not all of these companies went public in the U.S. by way of reverse merger or reverse takeover. But then allegations involving other companies that were sponsored by marquee underwriters and serviced by major law firms and accounting firms came to light. Longtop comes to mind. Investors were spooked. Liquidity dried up.

All these led to a rather inhospitable environment for Chinese companies. Whereas it was previously a major milestone and source of prestige to be listed in the U.S., Chinese entrepreneurs are now questioning the validity of that proposition. Chinese entrepreneurs are very pragmatic – the hallmark

of the pragmatism that pervades the Chinese economic system that produced them. When the valuation and liquidity are there, making capital raises possible, they do not mind the maintenance costs of being a public company. Such costs - audit, legal, IR, etc. - often can run into millions on an annual basis. However, when stock price pummels and investors' appetite all but vanishes, making it virtually impossible to raise capital -- at least at a reasonable multiple, maintenance costs which hit the bottom line begin to hurt.

Going private is often not an end in itself. Most of the companies I talk to have their sight set on a listing in Hong Kong or even mainland China where similar companies would be trading at several times the multiples one sees in the United States. This trend which began 18 to 24 months ago will continue for the foreseeable future.

Q. After taking on relatively small U.S.-listed companies, overseas shorts as you say have been taking aim at larger private-sector companies in the past year. Generally speaking, the shares have bounced back. What are some implications of all this going forward for investors and the listees?

A. This shows that there market is, at least at times, rational. When allegations by research shops affiliated with shorts do not hold water, the rebound in stock price reflects investors' reaction. Focus Media, the leading outdoor advertising company in China, is a case in point. Since the Muddy Water report last year, the stock price has bounced back significantly. The private bid by the bidder consortium (for Focus Media) actually put a price on the stock that exceeded the pre-Muddy Water report.

Q. . The so-called variable interest entity, or VIE, structure has been part of the foundation for a lot of U.S. listings of Chinese Internet companies, but the Obama government seems this year to be questioning its legality. How important is that? How might this affect U.S. listings by Chinese

companies in the future?

A. This is perhaps the issue of the year. Regulatory headwinds in China have been blowing. A number of important agencies in China such as MOFCOM are reportedly examining the legality of this structure. MOFCOM's recent anti-trust decision clearing Wal-Mart’s acquisition of a majority stake in

Yihaodian, a leading online supermarket, is the latest example.

In its decision, MOFCOM explicitly mentioned VIE and forbade Wal-Mart from circumventing regulatory restrictions by means of the VIE. So (there is) quite a bit of uncertainty at the moment.

This is a very important topic for investors and entrepreneurs alike because this has been the predominant way by which foreign investors invest in Chinese companies that are restricted for foreign investors. Think all things Internet. All things e-commerce. Simply put, the VIE structure, or variable interest entity, allows foreign investors to achieve de facto control of a Chinese operating business without direct equity ownership. This is accomplished by a web of contracts. Because of such control, under the relevant accounting rules financials of the operating business can be consolidated with those of the parent or listed company.